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Bitcoin—a pseudonymous cryptographic currency designed by an enigmatic, freedom-loving hacker, and currently used by the geek underground to buy and sell everything from servers to cellphone jammers. No, this isn't a cyberpunk artifact from Snow Crash or Neuromancer; it's a real currency currently valued several times higher than the US dollar, the British pound, and the Euro.

Bitcoin is a virtual currency, designed to allow people to buy and sell without centralized control by banks or governments, and it allows for pseudonymous transactions which aren't tied to a real identity. In keeping with the hacker ethos, Bitcoin has no need to trust any central authority; every aspect of the currency is confirmed and secured through the use of strong cryptography.

Over the last few months, Bitcoin's value has risen by an order of magnitude as the sagas of Wikileaks and Anonymous (among others) have highlighted the limits of a financial system which relies on centralized intermediaries. With a current estimated market capitalization of about $100 million, Bitcoin has recently graduated from a theoretical techno-anarchic project patronized by libertarians and hackers to a full-fledged currency prompting comment from technologists and economists. At the time of this writing, one Bitcoin (BTC) is worth about US$15.

So how does Bitcoin work? Is it really secure? And is it here to stay—or just another digital currency fad? Glad you asked.

Complexities of cryptographic currencies

The problem with purely digital currencies is that of double-spending. Economists in the audience will note that digital products like a movie or a text file are non-rivalrous. If you have a copy of my pseudo-trip-rock band's new MP3 album, there's still just as much MP3 to go around for everyone else who wants one. That's not a problem for files, but it is a problem with currency, since the whole point is that there's a limited supply. If you use a dollar at the grocery store today, you can't go out and spend that same dollar at a bar tomorrow.

The usual solution to the double-spending problem is a trusted intermediary. PayPal makes sure that you can't spend the same dollars twice by deducting them from your account before they get added to someone else's account. Visa, MasterCard, and every other bank and payment processor do the same. However, this centralized approach is the one that enigmatic creator Satoshi Nakamoto specifically tried to avoid in the original Bitcoin design. The idea was to use cryptography to create verifiable transaction records without the need to trust anyone but your own calculations.

The Bitcoin solution uses cryptography and an open transaction register. Whenever you spend a Bitcoin, you cryptographically sign a statement saying that you have transferred the coin to a new owner and you identify the new owner by their public crypto key. Whenever they need to spend the coin, the new owner uses his private key to sign it over to some further owner. As soon as a transaction takes place, the recipient (who has a very strong incentive to ensure that you don't spend the coin twice) publishes the transaction to the global Bitcoin network. Now every Bitcoin user has incontrovertible evidence that the coin has been spent, and users won't accept that coin from anyone but the new owner.

Mining and make-work

As a digital currency, Bitcoin suffers from a tangibility problem. Unlike other currencies traded online, you can't go to a bank and withdraw physical coins, so what are they? More importantly, where do they come from? Coins are essentially agreements between all the Bitcoin nodes to accept a particular coin as currency. They are created gradually according to a precise protocol in order to reward those who contribute and maintain the network, control the rate of creation of the currency, and maintain the integrity of the transaction list.

In a process known as mining, individual Bitcoin users attempt to generate new coins by checking the integrity of the transactions list. They confirm the previous transactions and attempt to solve a difficult proof-of-work problem which involves exhaustively trying different solutions. There are a very large number of such potential solutions, so the likelihood of finding the solution depends how many other people are looking for it and how much computing power you devote to the problem. The first client to find the solution announces its good fortune to the whole network and earns a little reward for itself in the form of some shiny new Bitcoins.

By finding the newest solution to the proof-of-work problem, a Bitcoin client confirms the history of previous transactions and moved the transaction register forward, allowing new debits and credits to form part of the next block that can be mined to earn more coins. Future coins can't be mined in advance, because the computation to find the new block (and hence create new Bitcoins) relies on the the chain of previous blocks and the history of transactions since the most recent block.

The number of new coins generated per block gradually decreases over time. It started out at 50 BTC, but will dwindle to zero sometime in future when all 21 million coins have been generated. Fortunately, coins can be divided down to the eighth decimal place, which may prove increasingly useful if their value grows.

A Bitcoin explainer

What's a few coins between friends?

One of the difficulties with a novel currency like Bitcoin is adoption and valuation. The same was true when the greenback paper dollar was first introduced, and it's a real problem with any means of exchange. After all, a currency is little more than something useless but rare which everyone agrees to trade for useful things, whether apples or assault rifles. National currencies have the advantage that governments demand them in taxes and require them to be accepted, which provides both a particular market and a high rate of adoption.

So, why would anyone exchange their hard-won dollars for Bitcoins, or accept Bitcoins in exchange for real products like a carton of milk or a subway ride? As a currency, Bitcoin has a number of desirable features which are not found together in any other currency. Cash has features like anonymity and eminent portability, but also comes with the downside that you have to physically move it from place to place to use it. Credit cards and other trust-based electronic currencies can be used instantly over any distance, but you have to attach your real identity to the purchase.

An anonymous Bitcoin transaction

Bitcoins combine the advantages of the two methods. Using Bitcoins, I can buy a racy t-shirt from Tibet and computer time from China without either merchant knowing who I am, or my bank knowing what I bought. This is useful not just for those purchasing questionable items (the downside of anonymous currency flows), but also for those who don't want merchants, banks, or card companies to be able to build up detailed profiles of their life, likes, and habits.

Since they're useful, some people want to use Bitcoins. Since some people want to use them, merchants have an incentive to accept them in order to attract the business of those customers.

This simplified economic model is not uncontested. Ars tech policy contributor Tim Lee has publiclycriticized Bitcoin's economic model, both from the point of view of external market forces and over the internal incentive structures inherent to the protocol. Tech and economic policy commentator Jerry Brito provides a counterpoint, emphasizing Bitcoin's decentralizaion, which makes it very hard to control, but concedes that it is very hard to distinguish between a currency bubble and currency value.

Bitcoin's anonymity has already attracted Congressional attention. Sen. Chuck Schumer (D-NY) this weekend blasted Silk Road, an online drugs outlet that allegedly relies on TOR to obfuscate Internet traffic and Bitcoins for payment. "It's an online form of money laundering used to disguise the source of money, and to disguise who's both selling and buying the drug," Schumer said.

If you are talking about value mixing two different currencies, then the current system already has that. Read about Mexico in 1993-1994. The exact scenario you are showing hypothetically was a real thing over here, just change BC for dollar and dollar for peso. People who owed money got totally screwed and a huge quantity of them went bankrupt. Any country who has its reserves in dollars and has a currency that over a short period of time loses value against the dollar will experiment that. The cause of the problem isn't attached to the currency itself, whether it is dollars, pesos, euros or bitcoins.

And there is a reason 1994 is called the Mexican Peso Crisis. This currency is in crisis from day one.

I don't care if it's used for money laundering or drugs or weapons or terrorism. Why should I? USD is used for all of those, perhaps with an extra step. That said, it is not a particularly useful currency until I can transfer Bitcoins to a cash card that is accepted anywhere debit/credit cards (with the obvious answer being that prepaid credit cards exist, bought with cash).

A.Felix wrote:If you are talking about value mixing two different currencies, then the current system already has that. Read about Mexico in 1993-1994. The exact scenario you are showing hypothetically was a real thing over here, just change BC for dollar and dollar for peso. People who owed money got totally screwed and a huge quantity of them went bankrupt. Any country who has its reserves in dollars and has a currency that over a short period of time loses value against the dollar will experiment that. The cause of the problem isn't attached to the currency itself, whether it is dollars, pesos, euros or bitcoins.

And there is a reason 1994 is called the Mexican Peso Crisis. This currency is in crisis from day one.

I see your point, what I don't see is how it is any different from any other currency that already exists. Maybe I am missing something but I'm led to think that by that logic every currency that can be traded for any other at a variable exchange rate was in crisis from day one. The first time a currency emerges its value is set against another, like when the euro came into existence. Eventually, the exchange rate between them is going to change, so if you took a loan on the one that gets better, while having to pay it with the other one, then you are screwed. If a French takes a loan on dollars, and next year the USD-EUR exchange rate benefited the dollar then that French guy owes more, does that mean the Euro was in crisis from day one?

Sure, right now the bitcoin is undergoing a valuation change that is way faster than what the euro had, but that happens in our current global system all the time with currencies from many countries, specially during a crisis. Why is it different because of the bitcoins?

There are a lot of sad people on here that think they understand A) economics and B) computer networks and cryptography. Most of you don't. But anyways I think what people are missing is that this (or something similar) will work if there is a "killer app" for it. Gambling and drugs seems to fit there pretty well. I don't really get into either, not because of the legal implications, it's just not my thing. But a little bird told me those activities are quite popular amongst humans.

The first time a currency emerges its value is set against another, like when the euro came into existence. Eventually, the exchange rate between them is going to change, so if you took a loan on the one that gets better, while having to pay it with the other one, then you are screwed. If a French takes a loan on dollars, and next year the USD-EUR exchange rate benefited the dollar then that French guy owes more, does that mean the Euro was in crisis from day one?

There are central banks who limit the exchange rate movements of currencies over time. When the Euro moves against the USD it rarely moves more than 10% in a year. As I've already explained, central banks issue and retire currency to control this movement, however they usually let exchange rates float somewhat as the amount of currency also is used for keeping interest rates, the economy and the value of the currency (inflation/deflation) stable. One of the most common causes of a currency crisis is when one nation owes debt that is denominated in another country's currency, as the central of the debtor country cannot print the currency the debt is denominated in.

There are central banks who limit the exchange rate movements of currencies over time. When the Euro moves against the USD it rarely moves more than 10% in a year. As I've already explained, central banks issue and retire currency to control this movement, however they usually let exchange rates float somewhat as the amount of currency also is used for keeping interest rates, the economy and the value of the currency (inflation/deflation) stable. One of the most common causes of a currency crisis is when one nation owes debt that is denominated in another country's currency, as the central of the debtor country cannot print the currency the debt is denominated in.

Ok, I think I'm getting it. Basically the main problem, as I am understanding it, is that bitcoin lacks a regulatory agency to keep its exchange rate or some other indication of value from spinning out of control, like it is doing right now, and provoking a currency crisis at some point (although I still argue that happens with or without bitcoins). But that leads me to a different question, wouldn't an unregulated value be a real one defined by the actual market instead of a manipulated one? Cash needs to have a regulated supply because it is essentially unlimited. Bitcoins have a limited supply (21 million and that's it), akin to metals I suppose. Banks can't regulate gold or silver, which are commonly traded and their value changes, they have seen spikes and drops in their USD equivalent prices that are more violent than what the dollar might have against the euro, but that is what the market decides they are worth and we all agree that is fair. If we all suddenly changed (back?) to a currency with actual gold and silver coins, would there be a need for a regulatory agency? And if there is, what could it do with them that isn't applicable to bitcoins?

@Hiawatha The Myths page does not address the concerns made in this thread. Indeed, it confirms the unfairness of the system (#12 "fairness" is an arbitrary concept, sic) and the Ponzi scheme similarity by evading the question (#16) and saying it's a win-win situation for both early and late adopters.

But what they really say is that late adopters have this huge benefit, namely that they are able to use the bitcoin currency [/irony], which they compare to the minuscule benefit of early adopters, namely that they are able to increase the value of their money several hundred times before this joke ends, because the value of the currency increased and because they were able to mine more free bitcoins than anybody else.

The myths page also confirms another highly unfair item, that anybody with enough computational power can print his own money, in as much quantity as he can, even possibly taking over the network (#20.) Call it "mining" to make it sound less frightening and hide the reality.

All the concerns about money-laundering are also evaded (#29,) starting with "hopefully" it won't happen, or talking about a "single organization" which is utterly irrelevant, or making the most stupid anal-ogy with the 9/11 planes, or saying that what we consider as money-laundering in the U.S. is perfectly legal in Nigeria and we should not worry about these legal aspects.

I also find the argument that the system is on control because it is a fixed resource of 21 millions bitcoins totally false, since it is 21 millions times 100,000,000 because of the 8 decimals. Well maybe 210 billions "only" if you count it in cents, the lowest currency used in transactions, and when the bitcoin is eventually worth $100, but it's still so high that it is in practice unlimited and uncontrolled for such a confidential market.

Ok, I think I'm getting it. Basically the main problem, as I am understanding it, is that bitcoin lacks a regulatory agency to keep its exchange rate or some other indication of value from spinning out of control, like it is doing right now, and provoking a currency crisis at some point (although I still argue that happens with or without bitcoins). But that leads me to a different question, wouldn't an unregulated value be a real one defined by the actual market instead of a manipulated one? Cash needs to have a regulated supply because it is essentially unlimited. Bitcoins have a limited supply (21 million and that's it), akin to metals I suppose. Banks can't regulate gold or silver, which are commonly traded and their value changes, they have seen spikes and drops in their USD equivalent prices that are more violent than what the dollar might have against the euro, but that is what the market decides they are worth and we all agree that is fair. If we all suddenly changed (back?) to a currency with actual gold and silver coins, would there be a need for a regulatory agency? And if there is, what could it do with them that isn't applicable to bitcoins?

You would think that having a stable supply would stabilize the supply/demand determined value, but it actually doesn't work that way. Since the supply is a fixed number of coins and the demand changes from day to day, this creates what is called price inelasticity (more demand for bitcoins doesn't create more bitcoin and less demand doesn't mean there are fewer of them). Small percentage changes in demand for bitcoin would cause larger percentage moves in the value of bitcoin. There is a reason we left the gold standard. One of the main points of currency is that you can make a contract for some amount of currency at some date in the future or put currency under you mattress and know what it will be worth.

TurtleBay wrote:So according to to the valuation chart, if I borrowed 1,000 BC I would have borrowed the equivalent of $1,000 in April but would now owe the equivalent of $22,000 less than 3 months later because of exchange rate moves. The bitcoin would need massively negative nominal interest rates for this to make sense. People who don't think we need a central bank should look at the bitcoin. It is massively deflationary. Sorry, but as a banker (I work in Loan Syndication for a major international bank) bitcoin is a huge joke.

Sure, but if your salary in bitcoins was the equivalent of $1000 in April, you would get paid the equivalent of $22,000 less than 3 months later because of exchange rate movements.

If you are talking about value mixing two different currencies, then the current system already has that. Read about Mexico in 1993-1994. The exact scenario you are showing hypothetically was a real thing over here, just change BC for dollar and dollar for peso. People who owed money got totally screwed and a huge quantity of them went bankrupt. Any country who has its reserves in dollars and has a currency that over a short period of time loses value against the dollar will experiment that. The cause of the problem isn't attached to the currency itself, whether it is dollars, pesos, euros or bitcoins.

If you ask for a loan in $1000 USD worth of EUR, and for some reason the EUR is worth twice next month, now you owe $2000 USD. What does having the Bitcoin or not has anything to do with this?

First sentence: If your salary is BTC75 in April and your salary is BTC75 3 months later then your salary is still BTC75.

If during that same period the dollar was devalued 95% relative to the BTC then you could make a killing in the currency market IF AND ONLY if your salary is paid in dollars and you bought bitcoins in April and sold them 3 months later ... otherwise your salary is unchanged and will purchase the same amount in April as it would in July in a market with BTC prices.

Real world examples are the Canadian dollar at +25% over 20 years, Euro at +50% over 20 years, Philippine Peso at -25% over 5 years, over 40 years the Phil Peso has gone from USD1=PHP2 to the present value of USD1=PHP43 (you could have made a killing in pesos by buying dollars in 1970, putting them in a cookie jar, then back in 2005 buying pesos when the rate was above PHP50=USD1) ... all on US dollars converted to the other currency and held in a cookie jar til present and then exchanged again for US dollars. Another currency is the British Pound. It was unlocked from the dollar about 1970 when the rate was USD2.50=GBP1 ... the rate is now near USD1.70-GBP....US dollars were a great investment for a Brit who wanted to stuff money in the mattress.

Your initial sentence is why currency traders can make millions of US dollar equivalent cash by buying and selling different currencies...their profit comes from the fact that exchange rates are NOT stable, do follow one another and change up and down regularly for reasons that the average person may never become aware of.

Currency mixing is a present day reality outside the US. In almost any country in the world, the US dollar is either a circulating currency or is acceptable to local merchants who accept US dollars as an alternative to the local national currency. Along the US/Canada border many US merchants accept Canadian money...in these dual currency situations prices are marked in local currency and the merchant informs customers what the day's exchange rate is for the other currency. This also occurs with oil. The price of oil purchased in the European Euro zone is set in US Dollars ... so the price of oil in Europe goes up and down with the Euro-US Dollar exchange rate in addition to the ups and downs of the petroleum commodity market ... it makes it a lot of fun for daytraders buying & selling oil while taking their profits in a non-US Dollar currency

As for your last comment about an American borrowing Euros equivalent to $1000 and repaying in dollars later when the Euro has appreciated against the dollar is daily reality for international lenders who also occasionally find themselves on the other side of that borrowing dollars with a Euro income and watch the Euro payments fall as the dollar falls against the Euro. This is a game played everyday by corporations who record sales in 2 or more currencies. It plays merry hell with the P&L statement when accounts that are recorded in different currencies refuse to keep a static value in the currency used for the statement

To wrap up, you forgot to make clear which of these problems you assign to Bitcoin does not already exist with traditional money.

The first time a currency emerges its value is set against another, like when the euro came into existence. Eventually, the exchange rate between them is going to change, so if you took a loan on the one that gets better, while having to pay it with the other one, then you are screwed. If a French takes a loan on dollars, and next year the USD-EUR exchange rate benefited the dollar then that French guy owes more, does that mean the Euro was in crisis from day one?

There are central banks who limit the exchange rate movements of currencies over time. When the Euro moves against the USD it rarely moves more than 10% in a year. As I've already explained, central banks issue and retire currency to control this movement, however they usually let exchange rates float somewhat as the amount of currency also is used for keeping interest rates, the economy and the value of the currency (inflation/deflation) stable. One of the most common causes of a currency crisis is when one nation owes debt that is denominated in another country's currency, as the central of the debtor country cannot print the currency the debt is denominated in.

Up until about 1970 there was a worldwide agreement as to what money was worth. Exchange rates valued in US Dollars were set. Exchange rates were allowed to float +/- 1US cent from that rate. The Central Bank for each currency bought or sold US Dollars to force the Currency Exchange Markets to price their currency "correctly". Once that treaty was cancelled Central Banks were free to play games with their domestic economies without worrying about what it did to investors trading across currencies. The result is that if you number your savings in terms of a different currency you will see changes in value even if your money is stuffed in a jar under the bed. People investing or trading across currencies deal with these changes every day.

Central Banks are free to control the rate of change of their currencies on the ForEx, but they still do it in the same manner that was used to 'freeze' exchange rates. They buy and sell foreign currencies to force the markets to value their currency "correctly". Central Banks that wish to control the value of the BTC as measured in their currency will be buying and selling BTC to manage the exchange rates. It does first require that the BTC become popular enough to come to the attention of the Central Banks though

Ok, I think I'm getting it. Basically the main problem, as I am understanding it, is that bitcoin lacks a regulatory agency to keep its exchange rate or some other indication of value from spinning out of control, like it is doing right now, and provoking a currency crisis at some point (although I still argue that happens with or without bitcoins). But that leads me to a different question, wouldn't an unregulated value be a real one defined by the actual market instead of a manipulated one? Cash needs to have a regulated supply because it is essentially unlimited. Bitcoins have a limited supply (21 million and that's it), akin to metals I suppose. Banks can't regulate gold or silver, which are commonly traded and their value changes, they have seen spikes and drops in their USD equivalent prices that are more violent than what the dollar might have against the euro, but that is what the market decides they are worth and we all agree that is fair. If we all suddenly changed (back?) to a currency with actual gold and silver coins, would there be a need for a regulatory agency? And if there is, what could it do with them that isn't applicable to bitcoins?

You would think that having a stable supply would stabilize the supply/demand determined value, but it actually doesn't work that way. Since the supply is a fixed number of coins and the demand changes from day to day, this creates what is called price inelasticity (more demand for bitcoins doesn't create more bitcoin and less demand doesn't mean there are fewer of them). Small percentage changes in demand for bitcoin would cause larger percentage moves in the value of bitcoin. There is a reason we left the gold standard. One of the main points of currency is that you can make a contract for some amount of currency at some date in the future or put currency under you mattress and know what it will be worth.

Put 100oz. of gold under your bed ... 20 years later it is worth 100oz. of goldPut $100 currency under your bed (in a container that keeps it safe) ... 20 years later it is worth $100Put £100 currency under your bed (in a container that keeps it safe) ... 20 years later it is worth £100I don't see what your problem is.

Now if you are trying to say that the price of gold measured in currency changesor that the price of a dollar measured in ounces of gold or poundsor that the price of a pound measured in ounces of gold or dollars ...

Well if you think that is weird then you have never used money to purchase anything except money of exactly the same type.

There are central banks who limit the exchange rate movements of currencies over time. When the Euro moves against the USD it rarely moves more than 10% in a year. As I've already explained, central banks issue and retire currency to control this movement, however they usually let exchange rates float somewhat as the amount of currency also is used for keeping interest rates, the economy and the value of the currency (inflation/deflation) stable. One of the most common causes of a currency crisis is when one nation owes debt that is denominated in another country's currency, as the central of the debtor country cannot print the currency the debt is denominated in.

@TurtleBay, a couple of points, I don't expect you to agree with me on everything since you're obviously a central money type of person, but I think these are worth stating:

1) Nobody who is sane is suggesting you only sell your goods and services in bitcoin and not another currency, store your life savings in it, or speculate on it if you are not an investor by trade.

2) There is a very quantifiable risk associated with using it, namely how much is your bitcoin stash worth? That's how much value you are risking, period. So if I treat it like USD, namely I don't rely on it long term, don't store a lot in it long term, but I do keep a small amount around for spending, then I'm risking very little. In the bitcoin case I mean the equivalent of ~$200. I keep a lot more actual USD around for rent and such, but also do not expect it to last in the long term. Why the hell would you keep a lot of USD when there are interest bearing investments or assets which appreciate against the USD which also represent less risk? It's really a no brainer...

3) I don't think any serious proponent of it is suggesting that you're going to be able to buy milk at the store in bitcoin anytime soon. The real market for this is digital goods and services, if there is one at all.

4) Why not let the market sort out which currency is better? By that I mean free competition of any currency the market wants to create and or use, but also free to refuse to use any currency. Remember, if there is one thing business likes it's stability, so if your centrally managed currency does in fact represent more stability it'll win in the market, or if it's better overall for some collection of reasons it'll win out. So what's the problem, don't have the gumption to back up your theory with data? Specifically where is your data that centrally controlled currencies are plainly better?

No gold, silver, platinum and the other metals traded as money are commodities that are in high demand by a large percentage of the population. This makes conversion to currency or direct barter trade for desired items very simple.

Dollars, Kroner, Bitcoins etc. have no intrinsic value. They are accounting tokens that are traded to anonymously track barter transactions without trading actual goods.

I don't understand how people can see metallic commodities as having 'intrinsic' value while discounting currency as arbitrary. I can't think off-hand of any benefit to my survival having a lump of some kind of inorganic dirt offers. Maybe I could hope that someone with a surplus would go 'ooh, shiny' and I could use it as some kind of accounting token to trade for actual food.

I think you are trying to reply to the other guy, TurtleBay. I am indeed making the point that most of the problems attributed to bitcoins are already in existence and aren't caused because of the use of a certain currency since they do not originate from this, but from the system in which said currency is used. Using euros, dollars, yens or bitcoins wouldn't be different as I can see. You even quoted an entire paragraph that wasn't written by me.

@gimfred:

No I am not against bitcoins per se. There might be valid reasons to be against it, but for the most part in this thread people don't raise any that aren't in existence right now but would be in a world where bitcoins were widely accepted. While I disagree with TurtleBay he seemed to be making a deeper point about something I don't fully understand. He says he worked in a bank so I take that as some bias towards a centralized system, but he knows more about the current system than I do, that's why he caught my interest on that.

I don't understand how people can see metallic commodities as having 'intrinsic' value while discounting currency as arbitrary. I can't think off-hand of any benefit to my survival having a lump of some kind of inorganic dirt offers. Maybe I could hope that someone with a surplus would go 'ooh, shiny' and I could use it as some kind of accounting token to trade for actual food.

While you're right to some extent you're also kinda wrong. You are right in so far as, if I'm stranded on a desert island, gold and other precious metals do not hold any value for me since they are functionally useless to keeping me alive. On the other hand, assuming we're talking about a modern industrialized economy instead of one guy on a desert island, the "intrinsic" value of metals depends on the metal. For some it is their extensive industrial applications that will be around for the foreseeable future, thus that gives them some sort of intrinsic value because other people are always going to have demand for them, thus creating value. For gold, it get's a little bit tricky, what gives it intrinsic value is the fact that it has been accepted as a currency for so long on this planet, people assume that it will continue to be accepted as currency (or be able to be traded for a local currency) no matter what. Gold is different in that its price is not really reflective of its industrial or medical applications. Those are incidental to its price, also they are a very low demand usage compared to the global reserves of gold.

Edit: grammar and replied to A.Felix

@felix - ya sorry I meant turtlebay, it's late and I should be sleeping, sorry again.

No gold, silver, platinum and the other metals traded as money are commodities that are in high demand by a large percentage of the population. This makes conversion to currency or direct barter trade for desired items very simple.

Dollars, Kroner, Bitcoins etc. have no intrinsic value. They are accounting tokens that are traded to anonymously track barter transactions without trading actual goods.

I don't understand how people can see metallic commodities as having 'intrinsic' value while discounting currency as arbitrary. I can't think off-hand of any benefit to my survival having a lump of some kind of inorganic dirt offers. Maybe I could hope that someone with a surplus would go 'ooh, shiny' and I could use it as some kind of accounting token to trade for actual food.

gold has been used as jewelry in every culture that has been able to obtain it. This is what makes it desirable as a trading material...it is easy to find someone who will trade something of real value such as food for bits of shiny metal. This was also the basis of the value of beads that were used by Europeans trading with American Indians. Later when the beads were as common as dirt, inflation had robbed them of any real value as trading tokens. Luckily gold is usually difficult to gather, so there will always be people willing to trade goods to get gold someone else has found.

The "value" of gold is very fragile though. When the price in real goods goes up people put more effort into gathering gold which then forces the price to crash ruining the efforts of those hoarding gold to take advantage of rising value. Also when the goods you are trying to obtain by trading your gold are scarce, people will often pass on the gold and keep the goods they actually need. Read Mark Twain's description of his time as a gold miner for his comments on this (An authorized Twain biography is available from Project Gutenberg)

I understand that I can get bitcoins for real money through some "exchange sites"

So, where did the exchange sites get the bitcoins from? By buying from other exchange sites or selling "services".

But no matter how you put it, there must be one or a few exchanges sites (or bitcoin participants or members or whatever you want to call it) *at the top of the pyramid*, who got the first bitcoins. So how did *they* get them?

I mean you can make all kinds of schemes, inclduing deflation, cryptography and mining, but you need to kickstart the whole thing by issuing some bitcoins to - at the very least - one participant, but in practice you need to issue to several. So how has that been decided, and who are they? I.e. who are the people on the top of the pyramid scheme?

It's called the "mining" process. All of the 21 millions of bitcoins in the pool have been or will be granted for free.Basically you run some computer programs to authenticate some bitcoin items, and in rewards you get 50 bitcoins for free. Well, at the beginning anyway. Now you get much less bitcoins for every authentication and less and less as more of the pool is assigned.I assume at the very start the creators of the system self-awarded themselves a bunch of bitcoins to seed the system.

That's a rather big difference with other alternate currencies such as the LETS system, where new members are granted some seed money only once when they join the system. With the bitcoin system, you get bitcoins for free continuously through the mining process.

As I understood from the articles, it takes about 10 minutes to compute a successful mining and you get 50 bitcoins in reward at the time the system was introduced. That's why I would have liked to see real life examples from both early adopters and newcomers in the Ars article.

It just makes me wonder how easy it is lose the coins? And how are they planning on coping with that there will be less and less of coins circulating after while?

If you hard drive dies do your coins disappear or can you get the if you have some code that nobody could remember? if is commonly used this will start to rack up.

And Id quite worry that even if transactions are not centralized control of coins and software will be.

Since it's all P2P, I don't think that's really a problem. There are records of every transaction floating around somewhere, so even if you computer blows up, I think the Bitcoins still exist and you could still use them (once you get a new computer, of course). The bigger problem would be forgetting or otherwise losing your private key (or address of whatever they call it). Presumably with no central authority, you can't get somebody to reset it for you and you'll have no way to prove that those bitcoins belong to you. Another problem would be if somebody dies and nobody knows about their bitcoins. That really could take bitcoins permanently out of circulation.

Please stop perpetuating the myth that exchange rates indicate which currency is stronger than another. Strength of a currency can only be measured through purchasing power, and that is a measure that is subjective since every consumer has a slightly different demand profile.

Heey, I was actually having this argument with a friend some time ago, but I wasn't able to convince him.Do you know where I can get more information about this, or at least more arguments?Thanks!

If trust is based on a peer to peer network that publishes transactions, then what stops a bad person from simultaneously spending a specific bitcoin at multiple different places?

Say a website in China, and one in Germany both accept bitcoin. From the US I write a program to simultaneously spend my bitcoin at both places. How could the peer to peer network possibly publish the updated transaction fast enough to both sides of the planet before I run off with the goods from both sites?

The transaction doesn't complete until the transaction with timestamp propagates to all users, after which, only the first transaction counts.

mehaase wrote:Please stop perpetuating the myth that exchange rates indicate which currency is stronger than another. Strength of a currency can only be measured through purchasing power, and that is a measure that is subjective since every consumer has a slightly different demand profile.

Heey, I was actually having this argument with a friend some time ago, but I wasn't able to convince him.Do you know where I can get more information about this, or at least more arguments?Thanks!

Sure, tell him that one Venezuelan bolívar is worth between 18 and 19 yens. For the sake of the argument round it up to 20, you buy 20 yens with 1 bolívar. Then tell him that at some point in the future the ratio would be 10 yens per bolívar. If he had the choice of storing his savings either in yens or bolívares, which one would he go for?

Anybody truly interested in how money works (with a bent towards US money) should read "What Has The Government Done To Our Money?" by Rothbard. It's available in free PDF form on the interwebtubes.

Rothbard also wrote a fantastic survey of monetary history in the US that stretches to the colonial period, which is very dry but very revealing of one simple truth: free market money was never tried in this country.

Anybody truly interested in how money works should ignore anything crackpot ideologues such as Rothbard. If he wrote a 'survey of monetary history' it is probably extremely misleading and factually-challenged.

No, but you can go to bitegg instead of newegg to buy computer parts.I am mining free bitcoins like a boss, at the stupendous rate of 26 megahashes per second.Taking into account the increased "difficulty" every few weeks, I should get my first bitcoin in about 2-3 months of uninterrupted 24/7 mining. I wish I had solar panels instead of an electricity bill, though.

Now if you are trying to say that the price of gold measured in currency changesor that the price of a dollar measured in ounces of gold or poundsor that the price of a pound measured in ounces of gold or dollars ...

Well if you think that is weird then you have never used money to purchase anything except money of exactly the same type.

The Federal Reserve attempts to stailize the dollar when measured though the GDP deflator (and CPI) which is a measure of price movement of all goods and services in the economy. This is useful because people want to price transactions which will occur in the future with money of a stable value. For example, if you are offered a job that will pay you $60,000 a year vs. the equivalent in bitcoin, you have much more certainty with the dollars. You could end up a millionaire or hungry on the streets with the extreme movements in bitcoin. Loans, and contracts for future delivery face similar problems when the exchangers of goods and services need to worry more about changes in value of the currency than changes in value of the goods and services. Part of the fundamental value of money is as a store of value and as a stable value of exchange, which relies upon inflation and deflation being low and stable.

BTW, the value of a bitcoin fell 30% today. Something in the afternoon would have to have cost 30% more than it did this morning. Not a very useful transactional currency either...

I counted at least 8 comments where the poster made long-winded claims of fact, pointed out their banking experience and in the exact same sentence pointed out that they really don't know much about bitcoin.

The whole article was pretty much the same way.

Price stability of the brand new currency, refunds, transactional anonymity, drug deals... has nothing to do with why bitcoin could be game changing.